DISRUPTION IS COMING

When it comes to being prepared for the future, businesses may be caught in a confidence bubble

Your head must truly be in the sand to not recognize the tectonic shifts poised to reshape the global economy. Competitive lifespans are shrinking, new entrants are becoming global competitors in the blink of eye, and technologies like artificial intelligence and additive manufacturing are advancing at a blistering pace.

Global executives clearly stand at notice and believe they can stay ahead. A recent survey we did of more than 340 senior executives found that more than 80% are confident their companies are prepared to change in response to disruptive trends within the next five years.

Yet, at the same time, only 7% say their companies are moving much faster than the market. This and other findings raise a dangerous question: are executives caught in a “confidence bubble?”

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The words drip with confidence. But what about their actions? When we dug deeper into executives’ activities and plans, we found their ability to respond to disruptive change is overstated at best, and perhaps even fundamentally misplaced.

First, only 23% of respondents expect their companies to face serious threat from new competitors in five years. If you asked automobile executives in 2012 who they worried about, the overwhelming response would be industry peers. If you ask them today who they worry about, the overwhelming response should be Tesla, Alphabet, and Uber (or, in other parts of the world, Ola, Go-Jek, and Grab). Tomorrow’s competitors will be different than today’s competitors. Executives need to increase the time they spend in, and the attention they pay to, the periphery of today’s industry, because that’s where tomorrow’s disruptors lurk.

Second, while the dominant driver of disruptive change is digital technologies, more than half of our survey respondents expect to either maintain or only modestly increase investments in digital over the next five years. Strategy isn’t what you say you do, it is what you actually do. Executives seeking to drive transformation need to identify critical strategic moves, and then allocate financial and human resources to turn today’s ambiguity into tomorrow’s opportunity.

Third, more than 80% of executives say that new business concepts get less attention than they should because top management tends to favor the legacy business. That’s no surprise. Businesses are designed to do what they are currently doing better, faster, or cheaper. A company’s “shadow strategy”—which resides in the day-to-day ways in which projects are funded, assets are allocated, rewards are doled out, and time is spent—defaults to “today better” even when “tomorrow different” is required. Organizations need bold and active leadership to reshape these day-to-day decision-making mechanisms.

Transforming an existing company in the face of disruptive change is the hardest challenge facing today’s executives. What makes it so hard is that executives need to execute two change efforts in parallel. The first, which we call Transformation A, is reshaping today’s business to buffer the blows of would-be disruptors. The second, which we call Transformation B, is catalyzing the energy in the winds of disruptive change to create a new growth engine.

This so-called dual transformation requires deep and lasting executive commitment. A parallel research effort we did found only 18 companies out of a sample set of more than 800 had a credible case for having successfully pulled off a dual transformation over the past decade. Those that did followed a consistent pattern: they chose to invest aggressively in transformation before they had to, they developed a compelling narrative detailing the next version of their organization, and they over-communicated that narrative to build deep and lasting organizational buy-in.

Of course, some of the successful transformers are founder-led technology companies such as Amazon.com and Netflix. Perhaps even more interesting are older, professionally managed companies. Consider Aetna. When Mark Bertolini became CEO in November 2010 it would be easy for him and his team to sit back and enjoy market forces that promised short-term benefits to insurance companies. Coming off record earnings, Bertolini made the bold decision to blow the company up and begin a multi-year effort to transform Aetna from a company that sells health insurance policies to companies to one that delivers health outcomes to patients and IT solutions to hospitals and physicians. The latest sign of Aetna’s shift? It recently announced plans to shift its top brass from its legacy headquarters in Hartford, Connecticut to new digs in New York City so leaders can be closer to that city’s pulsing digital ecosystem.

“I don’t think transformation begins and ends,” Bertolini told us. “I think it’s a continuous process. I think every organization I’ve ever been a part of has been in constant transformation. Everybody has the same problem. We need to look to ourselves as leaders to make that happen.”

While transformation is a daunting challenge, it also creates tremendous opportunity. Look how Netflix’s shift from sending DVDs through the mail to streaming services enabled it to become a global powerhouse, or how Arizona State University is using digital solutions to bring education to hundreds of thousands of people around the globe.

While disruptive shifts can take decades to play out, newspaper and retail executives will tell you how fierce the final stages of change can be. Executives in industries ranging from basic manufacturing to high-end financial services are in a precarious position. While their companies seem to be in a stronger competition position than ever, and they are going through the motions of responding to disruptive change, in our view most companies are still falling well short of rising to the transformation challenge.

Over the next few years, we expect to see significant separation between those that make the concerted, consistent efforts to drive transformation, and those whose rhetoric rings increasingly hollow as the competitive landscape rearranges.

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